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Act before the builder goes bust

There are some tell-tale signs such as slowdown in construction or absence of communication

Yogini Joglekar  |  Mumbai 

Recently, realty developer Housing Development Infrastructure (HDIL) issued a statement to say it was not going bankrupt. made this statement after its stock fell over 30 per cent in three trading sessions. This may have given some comfort to in HDIL's yet-to-be completed projects. But what about those who have booked flats in projects where details of the builder are not known? How will you know if your builder is in a position to complete the project or not?

While it is not easy to know if your builder is going bust, staying alert helps. experts say don't do enough research about their builders. How can a buyer know if his builder is going bust? If your builder asks more money in the initial stage of construction, that's something you need to watch out for. Developers build projects in three stages. The initial stage is building columns/slabs, followed with brick/wall construction and the final stage is providing building services. The initial stage is called the (reinforced cement concrete) stage.

Ashutosh Limaye, head-research at Jones Lang La'Salle-India, says that by the time the building completes the stage, most developers would have collected up to 80 per cent of the money from the buyers. "The builder only requires 40-50 per cent of the money, since it is the initial stage."

If the builder is asking for more money than he should for that stage of development, then you can move court. If he is threatening you for the same, then file a police complaint against him. However, if the matter is petty, one can resolve it by merely approaching a consumer court.

Slowdown in construction and approvals: "Inordinate delay for want of permissions and sanctions may be a reason for the developer to go bust, as finances are also raised by way of loans and nursing the debt becomes a problem if the project hits a road block. This also causes the existing buyers to seek refund, which may add to developers' woes," says Anshuman Jagtap, advocate at Hariani & Co, a Mumbai-based law firm.

One cannot arrive at this conclusion just because approvals are getting delayed. Certain approvals take as long as six months and many are also given while the project is half-built. However, experts say if construction of half-built projects has stalled for more than eight months, one needs to worry. Regular visits to the site could help you get a sense of the work in progress. Hence, a slowdown in construction leads to delay in launches. This is not a good sign, as it might indicate that the builder does not have sufficient cash-flows.

What you can do: Such instances are likely to happen and, hence, it's important you read your agreement carefully. For instance, you as a home-buyer can add this clause in your house-agreement, "If the developer is unable to finish constructing a certain number of floors in a given period, he is liable to repay you for that loss." Lawyers say alterations in agreements should be made in such a way that the home buyer has the upper hand if the developer falls flat on his promises.

When you stop getting letters from builder: When the house is bought through a home-loan, both your bank and you get letters from the builder reminding about the next payment. Usually, a home buyer has to pay 30 per cent of the agreement amount at the plinth level, and five per cent at every new slab or floor built. Such reminders/letters come to you, depending on the progress of the construction. However, if the frequency at which you get letters suddenly slows, it could mean the builder is not constructing the building at the same speed as before. The reason could be delay in approvals or maybe he has run out of the money collected from home buyers and cannot ask for more as it won't justify his level/stage of construction.

What you can do: A bank doesn't lend to the developer unless his property is registered. So, if the developer defaults on his promises, legal action can be taken against him.

Builder is debt-ridden: Usually, a builder who has a 1:1 debt to equity ratio is said to have sound financials. Most listed companies sell their lands to improve their operating cash flow. Less debt on a builder helps him repay interest and service loans that he has taken from his bank/NBFC/private equity. Sanjay Dutt, executive managing director, south Asia, Cushman & Wakefield, cautions that many small developers could have 1:6 or 1:8 debt:equity ratios, not good in the long run. "A builder's finances look safe if the debt taken is in sync or equal to his own investments. One can get such information from the bank which is financing their project. A bank can also help you know if the developer has got clear titles." A bank funds a project for 12 per cent, whereas an NBFC will charge 15-18 per cent for the same project. Hence, who lends to the project could also give an indication about the developer's financial position.

What you can do: "As a thumb rule, if you get signs of your developer going bust, it is important to lodge a claim to the property immediately with the forum before which the bankruptcy or liquidation process is going on. This will help secure the amount, if not the property," says Jagtap of Hariani & Co.

The developer owes to tax department?: It is important to know how much your developer owes to the tax department. It's important that your developer has a good reputation in paying taxes. He shouldn't be owing too much to the revenue and octroi department. As a home buyer, one can check such notices in newspapers; some could also be available in the public domain on tax websites. So, buyers should always keep a watch for any such news about their developers.

What you can do: The developer has run out of money but has a lot of unpaid By law, the taxes are attached to the land, due to which there are chances your property/land could be seized by the tax department. In such cases, you can sue your developer as the court will then attach his personal assets to repay those outstanding taxes. This will protect the property for which the buyer has paid.

The developer should also have the right way of marketing and sales. If the builder is selling homes at lucrative prices with unrealistic offers, one should be cautious before plunging into it. Finally, it is important your developer has a good record in the market. You definitely don't want to be associated with someone who doesn't have a good perception in the market. You should visit the site and corporate office to gauge for yourself the environment under which your developer functions.

First Published: Sun, March 17 2013. 22:27 IST